Matter of Typhoon Industries, Inc.
| Decision Date | 10 November 1980 |
| Docket Number | Bankruptcy No. 77 B 52. |
| Parties | In the Matter of TYPHOON INDUSTRIES, INC., Bankrupt. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York |
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Guggenheimer & Untermyer, New York City, by Ephraim K. Leibowitz, New York City, for Trustee.
Edward R. Korman, U.S. Atty., for the Eastern District of New York, by Karen Brown, Tax Div., U.S. Dept. of Justice, Washington, D.C., for claimant United States.
The Court is called upon to resolve an objection to the claim of the District Director of the Internal Revenue Service advanced by the trustee of Typhoon Industries, Inc., an involuntary bankrupt. The government's claim, filed with this Court on October 20, 1977, demands payment of the sum of $55,354.48 as a priority claim for unpaid federal insurance contributions, withholding and unemployment taxes, together with pre-petition interest thereon. The claim includes taxes assessed against Typhoon Installation, Inc., Typhoon Fence of Jamaica, and Typhoon Industrial Fence, Inc., all of which are affiliates of the bankrupt corporation. The trustee's objection is based on his contentions that these affiliates are not subsidiaries of the bankrupt, and that in any event, the affiliates have been operated as independent corporate entities. For reasons which follow, the Court holds that the government's claim should be allowed in part as a fourth priority claim for non-dischargeable taxes, and allowed in part as a general unsecured claim.
1. An involuntary petition was filed against Typhoon Industries, Inc., on January 7, 1977. On March 2, 1977, an order was entered adjudicating the alleged debtor a bankrupt.
2. The District Director of the Internal Revenue ("the government") timely filed a claim against the bankrupt's estate on October 19, 1977. As amended on October 20, 1977, the government's claim seeks payment of the sum of $55,354.58 as a fourth priority claim for unpaid income tax withholding, federal insurance contributions ("FICA taxes"), and unemployment taxes ("FUTA taxes"), as well as pre-petition interest thereon.
3. Taxes assessed against the bankrupt for calendar year 1973 are included in the government's claim. Also included in the government's claim are taxes for various years, including 1973, which were assessed against Typhoon Installation, Inc., Typhoon Fence of Jamaica, Inc., and Typhoon Industrial Fence, Inc. The government's claim itemizes the specific taxes as follows (interest amounts are indicated in parentheses beneath the tax figures):
Typhoon Industries, Inc
Period Withholding & FICA FUTA
------------------------------------------------------------
1st Qtr. 1973 $2,934.22
(751.83)
2nd Qtr. 1973 $5,495.76
(1,187.87)
3rd Qtr. 1973 $3,662.45
(641.32)
4th Qtr. 1973 $3,830.40
(792.23)
1973 $ 825.59
(185.05)
4th Qtr. 1976 $5,366.81
1976 $3,192.06
TOTAL $24,662.89 $4,202.70
------------------------------------------------------------
Typhoon Installation Inc
Period Withholding & FICA FUTA
------------------------------------------------------------
1st Qtr. 1973 $2,392.98
(251.26)
4th Qtr. 1976 $ 712.79
1976 $ 814.44
TOTAL $3,884.94 $ 814.44
------------------------------------------------------------
Typhoon Fence of Jamaica, Inc
Period Withholding & FICA FUTA
------------------------------------------------------------
1st Qtr. 1973 $ 372.97
(92.71)
2nd Qtr. 1973 $ 372.97
(83.33)
3rd Qtr. 1973 $ 372.97
(81.47)
4th Qtr. 1973 $ 372.97
(72.87)
1973 $ 176.88
(35.98)
4th Qtr. 1976 $2,062.68
1976 $ 420.14
TOTAL $3,884.94 $ 633.00
------------------------------------------------------------
Typhoon Industrial Fence, Inc
Period Withholding & FICA FUTA
------------------------------------------------------------
1st Qtr. 1973 $ 298.48
(74.18)
2nd Qtr. 1973 $ 298.42
(66.67)
3rd Qtr. 1973 $ 298.42
(65.18)
4th Qtr. 1973 $ 298.42
(60.76)
------------------------------------------------------------
Typhoon Industrial Fence, Inc. (continued)
Period Withholding & FICA FUTA
------------------------------------------------------------
1st Qtr. 1976 $ 4,871.09
(236.78)
2nd Qtr. 1976 $ 2,339.97
(72.35)
3rd Qtr. 1976 $ 4,751.00
(63.76)
4th Qtr. 1976 $ 3,200.11
1976 $803.99
TOTAL $16,995.59 $803.99
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4. The trustee concedes, and the Court finds, that the government's claim is correct as to amount. Tr. at 43.
5. Benito Fernandez is the sole shareholder of Typhoon Industries, Inc., having acquired all of its shares in May of 1973. At the same time, he acquired all of the shares of Typhoon Installation, Inc., Typhoon Fence of Jamaica, Inc., and Typhoon Industrial Fence, Inc. (these three corporations are hereinafter referred to as "affiliates" of the bankrupt). Thereafter, B.R. Fernandez, Inc., a corporation wholly owned by Benito Fernandez, acquired all of the assets of Typhoon Industries, Inc., and changed its name to Typhoon Industries, Inc. Benito Fernandez had planned to have Typhoon Industries, Inc., purchase the shares of the affiliates from him, but this plan was never consummated. At all times relevant hereto, the relationship which existed between the bankrupt and its affiliates was that of brother and sister, rather than parent and subsidiary. Tr. at 40.
6. At all times relevant hereto, Benito Fernandez was the sole shareholder, sole director, Chairman of the Board and Chief Executive Officer of the bankrupt corporation and each of its affiliates. Tr. at 14, 17, 38.
7. Each of the affiliates had its own manager. Each manager served as an officer of his respective affiliate, as well as an officer of the bankrupt. Tr. at 18, 21. In all respects other than this, the bankrupt and its affiliates had common management.
8. Each of the affiliates shared office space with the bankrupt at Lindenhurst, Suffolk County, New York. They also shared the same telephone number. In addition, Typhoon Fence of Jamaica, Inc., maintained its own office and telephone number in Jamaica, Queens, New York. Tr. at 18.
9. All accounting for the affiliates was done on the books and records of the bankrupt corporation. Tr. at 21.
10. Each of the affiliates maintained separate checking accounts which were used as petty cash for small disbursements. All major expenses, including materials, supplies, taxes and the payroll, were paid by the bankrupt corporation from its own accounts. Tr. at 18-20.
11. Contracts which were executed by the affiliates had to be approved by the bankrupt corporation. Tr. at 20.
12. The letterhead of each affiliate bore a caption indicating that the affiliate was a division of the bankrupt corporation. Tr. at 17.
13. Customers of the affiliates frequently paid their bills with checks made payable to the bankrupt corporation. Checks which named the affiliates as payee were indorsed over to the bankrupt as a matter of course. Tr. at 31-32. All other monies received by the affiliates were deposited in the bankrupt's account. Tr. at 19, 22.
14. Benito Fernandez intended to operate the affiliates on a "break even" basis. Any cash surplus which remained with an affiliate was transferred to the bankrupt as a matter of course at the end of each accounting period. Tr. at 34-35.
15. The affiliates had virtually no assets. Vehicles and other equipment were owned by the bankrupt and used by the affiliates. Typhoon Fence of Jamaica, Inc., however, had its own office furniture for its office in Jamaica, Queens. Tr. at 29-30.
16. Each of the affiliates maintained its own employer identification number for federal payroll tax purposes. Whenever payroll taxes were withheld and paid, however, the bankrupt corporation withheld and paid these taxes for each of the affiliates. Tr. at 16, 20-21, 27-28.
17. The bankrupt maintained one workmen's compensation insurance policy and disability insurance policy for itself and all of the affiliates. Tr. at 21-22.
18. The bankrupt and its affiliates functioned as a single unit. Tr. at 28.
19. The New York State Secretary of State dissolved each of the affiliates for non-payment of franchise taxes. None of the affiliates has transacted any business since 1977. Tr. at 36, 38-39.
20. As a result of the dissolution of the affiliates as no asset corporations, the government has no effective remedy against the affiliates for unpaid taxes.
1. A corporation may be held liable for the obligations of commonly owned affiliate corporations, notwithstanding the absence of a parent-subsidiary relationship, if circumstances indicate that it would be inequitable for the corporation to escape liability for the affiliates'...
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